ECO 481: Public Choice Theory Week 2 - Part I: Week 2 - Part I: The Rationale for The Rationale for Government Government Dr. Dennis Foster
ECO 481:Public Choice Theory
Week 2 - Part I:Week 2 - Part I:
The Rationale for The Rationale for
GovernmentGovernment
Dr. Dennis Foster
Market FailureMarket Failure
The Case of Public Goods:The Case of Public Goods:• Non-excludable & non-rival.• Free rider problem.• Private markets will “underprovide.”–Graphical representation.
The Case of Negative Externalities:The Case of Negative Externalities:• Free rider problem.• Private markets will “overprovide.”–Graphical representation.
Welfare Economics
Sources of market failure:Sources of market failure:• Market is not exhausting all advantageous
trade– Public Good & positive externality.
• Negative externalities.• Information problems.• Market instability.
Policy prescriptions:• Persuasion/Regulation/Gov’t Expenditure
Rethinking Market Failure
The Market Process:The Market Process:
• The coordination of activity.–What do people want?
• The competing use of scare resources.–How much is right?
– The role of prices.
– The role of profit & loss.
• I, Pencil and Milton Friedman’s version.
• Markets need . . . stable legal structure (?)
Assessing Market Failure
Public Goods:Public Goods:• How much is right?– The “well balanced” transportation system.
• How do you finance?– Free rider is replaced by “forced rider.”–Does that really alleviate this “problem?”
• Should any good with MC=0 be provided?• How would the market respond?–Bus vs. cab example.
Assessing Market Failure
Imperfect Competition & Information Issues:Imperfect Competition & Information Issues:• Monopoly harm . . . to whom?• Is there such a thing as “predatory
pricing?”• Monopoly shortcomings & government.• Political response of anti-trust laws.
• Can we actually have perfect information?• Hayek and the market process.
Distribution Issues:Distribution Issues:• Markets reward contribution, not effort.• Is there an “arbitrary distribution of natural
abilities?”• Star Parker - what does gov’t redistribution
do?• How many are on food stamps?–Who benefits from food stamps?– Stossel and cotton subsidies.
Market Failure
Transaction Costs & Regulation:Transaction Costs & Regulation:• Standardizing - weights and measures.• Can’t markets reduce these costs?
• Do regulations really reduce these costs?– Stossel video (Institute for Justice)–Coyote blog– Toys
• Do businesses like to compete?